NEW YORK, April 8 Banks bought a record amount
of Treasuries at auctions held by the U.S. government two weeks
ago, despite market worries about whether the Federal Reserve
might raise interest rates sooner than some traders had thought,
according to Treasury data.

The Treasury awarded $4.976 billion of the $35 billion in
five-year notes it offered to depository institutions and $4.550
billion of the $29 billion of seven-year debt it offered to this
group of buyers, the data released late Monday showed. That
comes to about 15 percent of the combined sales.

Analysts said the bank purchases of five-year and seven-year
new Treasuries in March were unusual, and it was not clear what
may have produced the sudden buying binge.

"It might be a fluke or a mistake," said Mary Beth Fisher,
head of U.S. interest rate strategy at SG Corporate & Investment
Banking in New York.

Other possibilities included one or a few banks buying for
quarter-end portfolio rebalancing or capital requirements,
analysts said.

Banks have steadily grown their Treasuries and agency
securities holdings since last year, albeit not directly through
auctions. Treasuries yields had risen, making them more
profitable for banks to hold, analysts said.

Five-year and seven-year yields were 1.67 percent and 2.24
percent late on Tuesday, respectively. They were up about 1
percentage point from a year ago.

According to Federal Reserve data, commercial banks held
$1.85 trillion in Treasuries and agency debt in the week ended
March 26, up about $45 billion since the end of 2013. It was the
highest level since February 2013.

A Treasury Department spokesperson said it does not comment
on individual bidders in auctions.

Banks' demand for these debt maturities came at the expense
of other major buyers.

For example, U.S. primary dealers, other commercial bank
dealer departments, and other non-bank dealers and brokers,
ended up with $10.376 billion of the five-year note supply
offered in March, down from $15.419 billion in February.

Primary dealers are the 22 U.S. major bond dealers that do
business directly with the Federal Reserve. Participating at
U.S. Treasuries auctions is a key role of a primary dealer.

Fisher and a few other analysts speculated the sharp shift
in the amounts of debt purchased between banks and dealers might
stem from the Fed adding TD Securities as a primary dealer back
on Feb. 11.

TD Securities is the U.S. broker-dealer arm of Canada's
Toronto-Dominion Bank.

The Treasury might have classified TD's Treasuries five-year
debt purchases in March as a bank instead of a dealer, according
to these analysts.

This view, however, is weakened when one considers that TD
was designated as a primary dealer prior to the February sales
of five-year and seven-year debt whose results showed no unusual
purchases between banks and dealers.

A TD Securities spokeswoman could not immediately be reached
for comment.

In February, the depository institutions category of
investors, which includes banks, savings and loan associations,
credit unions, and commercial bank investment accounts, bought a
combined $71 million of five-year and seven-year note supply - a
bit more than one-tenth of a percent of the combined $65 billion
sold.

Before March, the prior record on Treasuries auction
purchases by banks occurred in March 2010 when they bought
$2.569 billion in benchmark 10-year notes and $3.142
billion in 30-year bonds, according to data from the
Treasury.

A week before the five-year and seven-year note sales, the
Fed gave indications that it would end its massive bond-buying
program this autumn. Fed Chair Janet Yellen, in a March 19 news
conference following the meeting, said the Fed could start
raising interest rates around six months later.

This sent the Treasuries market reeling and caused the
five-year note to suffer its worst day since last July and the
seven-year note to post its worst day since November, according
to Reuters data.
(Additional reporting by Jason Lange in Washington; Editing by
Tom Brown and Lisa Shumaker)

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